Inflationary pressure (measured by changes in the consumer price index) has been easing.

The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank’s bi-monthly monetary policy statements.

To some extent, lower than expected inflation has been enabled by the sharper than expected decline in prices of vegetables and fruits since September, ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil. Crude prices, barring geo-political shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December.

Finally, the government has reiterated its commitment to adhering to its fiscal deficit target.

The above factors have significantly reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects. Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009. Inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015. On current policy settings, inflation is likely to be below 6 per cent by January 2016.

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Mr. Surendra Naik is a retired Chief Manager from Indian Overseas Bank and Founder, Chief Editor of www.bankingschool.co.in. He worked at IOB for three and half decades and specialized in Credit Appraisal & Forex.